TAXABILITY OF CONTRIBUTIONS RECEIVED FROM MEMBERS

[Dr. Sanjiv Agarwal]

In community living where many families (members) live together in a society with common facilities and expenses being incurred and taken on contribution basis by an association or society, commonly called ‘Resident Welfare Associations’ (RWAs), often doubt arises on taxability of such contributions by members to the RWAs. Such contributions could be towards regular contributions or corpus fund. Such charges or contributions are generally fixed per unit or month or on area basis. Whether GST would be levied on such contributions including towards corpus fund has been interpreted in an advance ruling duly confirmed by Appellate Authority in a matter of Vaishnavi Splendour Homeowners Welfare Association. It also ruled that input tax credit would be available on inward supplies, but however, subject to restrictions as per law.

The Applicant was a Homeowners' Association with 88 members. It maintained the common area, viz. corridors, pathways, gardens, club-house, swimming pool, lifts, etc., provides lighting in common area, undertakes periodic up-keep of equipments etc., in the play area, etc. It collected annual contributions from its members calculated on the basis of super built-up area owned by the members. It also collected contributions towards corpus fund for future contingencies.

The applicant sought advance ruling from the Authority for Advance Ruling, Karnataka on the following questions:

1. Whether the applicant is liable to pay CGST and SGST on the amount of contribution received from its members?
2. If the answer to (1) above is “yes”, whether it can avail the benefit of Notification No. 12/2017 dated 28.06.2017 (S. No. 77) read with Notification No. 02/2018 dated 25.01.2018 which provide for exempting from tax, the value of supply up to an amount of ₹ 7,500 per month per member ?
3. If the answer to (2) above is “yes”, whether it is required to restrict its claim of input tax credit?
4. Whether the applicant is liable to pay CGST/ SGST on amounts which it collects from its members for setting up a corpus fund.

The AAR observed that there is no dispute that the applicant is performing certain operations / services for which consideration is received. There is no such thing in the law that services provided as statutory obligations are not “supplies” under the definition of the Act.The activity of the applicant is a provision of services to its members, and it is in the form of reimbursement of charges or share of contribution and the applicant is a non-profit entity.Regarding the taxability of the transaction, the service is covered under the Heading 9995.

Vide Ruling dated 17.09.2019 IN RE: M/S. VAISHNAVI SPLENDOUR HOME OWNERS WELFARE ASSOCIATION [2019 (11) TMI 155 - AUTHORITY FOR ADVANCE RULING, KARNATAKA], the Authority for Advance Ruling, thus, ruled as follows:

1. The applicant is liable to pay CGST and SGST on the amount of contribution received from its members as their activities amount to taxable supply of service.
2. The benefit of exemption, under entry no. 77 of Notification No. 12/2017 -Central Tax (Rate) dated 28.06.2017 (as amended by Notification No. 02/2018 - Central Tax (Rate) dated 25.01.2018), is available to the applicant only if maintenance charges (contributions) do not exceed ₹ 7,500/ - per month per member. In case the charges exceed ₹ 7,500/- per month per member, the entire amount is taxable.
3. The applicant is eligible to claim input tax credit on the inward supplies of goods and services and this is subject to the restrictions as enumerated in Section 17(2) of the CGST Act read with Rule 42 of the CGST Rules and other restrictions applicable if any.
4. The applicant is not liable to pay CGST/SGST on amounts collected from members for setting up a corpus fund.

Being aggrieved, the assessee filed an appeal u/s 100 of the CGST Act, 2017 before AAAR, Karnataka.

The appellant submitted thatGST is leviable only in the circumstances where there is existence of privity of contract between the supplier and the recipient. When the members’ association effects any supplies to its members, the supplier and the recipient are one and the same and therefore, there is an absence of privity of contract. Accordingly, there cannot be any charge of GST on such transactions.

Further, Authority for Advance Ruling is a quasi-judicial authority; that quasi- judicial authorities are bound to decide the matters independent of departmental circulars; that departmental circulars clarifying the departmental stand on the matter cannot be the basis for the decision by the authority. Yet, Authority has given the ruling by merely following the CBIC Circular No. 109/28/2019-GST dated 22-07-2019. They contended that the ruling given by merely quoting the circular is not a speaking ruling.

Appellant pleaded to hold that the amount of contributions received by the appellant from its members is not taxable or in the alternative, to hold that such amount of contributions as are in excess of ₹ 7500 per month per member alone are taxable.

The AAAR observed and held that in the instant case, the monthly contribution made by the members to the association is in return for receiving the services of the Association in ensuring the maintenance and upkeep of the residential complex. The money collected by the Appellant from its members is used to procure services and goods from a third party and provide the benefits of such procured goods and services to the members of the association. In terms of Section 2(d) of the Indian Contract Act, 1872, consideration needs to necessarily flow from one person to another.

In the Finance Act, 1994, the taxable event in terms of Section 66B was on services ‘provided or agreed to be provided by one person to another’. Under GST, the taxable event is the “supply” of goods or services or both. As already mentioned, ‘supply’ though not defined has been explained in Section 7 of the CGST Act, 2017 to cover the activities stated therein made in the course or furtherance of business. Under GST law, the term ‘business’ has been specifically defined in Section 2(17) of the CGST Act to include provision by a club, association, society or any such body (for a subscription or any other consideration) of facilities or benefits to its members. Thus, there is a marked difference in the concept of the levy between the Finance Act and the CGST Act. Thus, there is a supply of service by the Appellant to its members and the same is taxable under GST.

Further, on taxability of contribution of members, in terms of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017, it was held that exemption notifications are subject to strict interpretation. The Advance Ruling Authority had correctly interpreted this exemption Notification. The Circular No.109/28/2019-GST dated 22.07.2019 issued by the CBIC only clarifies this position. The Appellant has argued that this Circular will apply only prospectively since it is oppressive in nature. This argument does not hold water since the said Circular does not introduce any new levy by its clarifications. The position regarding the exemption from GST was always applicable only when the individual member’s contribution per month was within ₹ 7500/-. The Circular dated 22.07.2019 only clarified this position and did not bring in any new levy. Hence the question of applying the Circular prospectively does not arise.

On appellant’s stand of non-maintainability of Advance Ruling pronounced after 90 days period as per law, it was held that no doubt the ruling given by the Authority has been passed after the time period stipulated under the statute. However, that does not render the ruling null and void or unsustainable. An order which is passed without jurisdiction can be held to be null and void and unsustainable. However, an order suffering from illegality or irregularity of procedure cannot be termed in executable. The remedy of a person aggrieved by such an order is to have it set aside in duly constituted legal proceedings or by a superior court failing which he must obey the order. An order passed by a court of competent jurisdiction cannot be denuded of its efficacy by any collateral attack or in incidental proceedings. The Authority was well within its jurisdiction to pass a ruling on the subject matter. Not adhering to the time limit in passing an order can be termed as an irregularity in procedure which can be set right in appeal proceedings.

In the result, the AAAR ruled that the ruling given by AAR was correct in law and declined to interfere with the same. The AAR order was upheld and appeal dismissed. [IN RE: M/S. VAISHNAVI SPLENDOUR HOMEOWNERS WELFARE ASSOCIATION (2020 (2) TMI 435 - APPELLATE AUTHORITY FOR ADVANCE RULING, KARNATAKA)].